United States

S Corporation shareholders should watch for letter from IRS

Letters likely going to individuals claiming losses from S Corporation

TAX ALERT  | 

Many S corporation shareholders will be receiving letters from the IRS, possibly next month, reminding them of potential limitations on their ability to claim losses passing through on Schedule K-1 from an S corporation. This is according to informal discussions with a representative of the IRS with significant involvement in the compliance program.

Compliance Campaign

The “S Corporation Losses in Excess of Basis Campaign” is one of 13 compliance campaigns announced earlier this year by the IRS Large Business and International division. These campaigns are part of the IRS’s effort to more precisely focus their efforts on areas of perceived noncompliance. The S corporation campaign is directed toward identifying S corporation shareholders who are claiming flowthrough losses from S corporations without substantiating that they have sufficient basis to recognize those losses.

These soon-to-be mailed “soft letters” are one of several treatment streams that the IRS identified earlier this year when it announced the S corporation campaign. Other treatment streams, including new forms to help shareholders properly calculate their basis, likely will take longer to implement, according to the IRS representative.

Although it isn’t entirely clear what these soft letters will say, it appears that the most likely recipients are those shareholders who reported a loss on their individual income tax returns from an S corporation without attaching a basis calculation.

Implications

The timing on these letters remains somewhat uncertain, but the representative confirmed that they plan to begin sending letters in the near future, possibly as soon as late Oct. Shareholders who have claimed losses from S corporations should ensure that they have their basis calculations ready in the event they receive one of these letters. It isn’t clear whether the soft-letter will require a formal response, but prior statements from IRS representatives suggest that a failure to respond might be relevant when the IRS decides whether to pursue the issue more formally with the taxpayer.

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